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© Business Money Ltd 2006 |
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The 2004 Business Money All-Asset Finance Conference21 April 2004When we set out to prepare our first conference we had a number of objectives in mind. The first was that this had to be a conference with relevance to the industry we serve. The second was that we would conduct it in a format designed to ensure that those who attended found the programme invigorating as opposed to the more soporific content to be found in certain events of this nature. The medium was the fast growing field of all-asset finance and given that this is mostly a big-ticket exercise we believed that the first European conference devoted specifically to this type of finance should attract the top players. It did. There are seven major lenders in this field in the United Kingdom; Lloyds TSB Commercial Finance, Venture Finance, GMAC Commercial Finance, GE Commercial Finance, Burdale and Bank of America with Enterprise Finance Europe becoming evermore closely involved. We had acceptances from the chief executives of all seven and in the event the only absentee was Dennis Levine of Burdale who tendered his profound regrets as he had to attend a call by his masters in New York to a meeting. Our next aim was to ensure that we embraced the growing European market and looked at the legal practicalities and challenges attending it. But above all, I wished to see some substantial American influence. In this we were fortunate in that Keith Karako of Citigroup, who writes much business in Britain but who works out of New York, kindly agreed to attend, so the format was falling nicely into place. I next wished to establish the potential for growth in the United Kingdom, also to tackle any perceived inhibitions to that end and writ large on this tablet were the words “reservation of title”. This is a complex area and so we opted for an open forum debate. We took our lives in our hands here but we believed that we had enough friends in the audience blessed with strong views on the subject. Mindful that the after lunch slot is a challenge for any speaker, we employed the legendary Dennis Turner to give us a breakdown of the economic scene. For the mid-afternoon we focused on an area which causes considerable concern in the industry, fraud, and closed the conference with what I hoped would be something of a trump card to stimulate further thought and debate. We booked The Hatton conference centre in London which had advantages as far as location was concerned and at 9 o’clock on the morning of 21 April, the 60 delegates attending started to register. Andrew Knight and Chris Harlowe of Speechly Bircham kicked off. We had asked them to examine the European legal scene, the changes and challenges, and they did not let us down. Andrew opened looking at the positive side and he focused on structuring pan-European asset-based lending transactions. He implored us to not let the EU fool us and told us that Europe is not a single legal system but lots of legal systems coupled together which are not consistent with each other, and nor are the inconsistencies logical. He warned us that EU harmonisation had penetrated less than we might imagine. He continued his theme highlighting those countries in which the climate was highly favourable, those where there was some moderate support for asset-based lending and those where business was difficult but could be done at additional cost or inconvenience. He then went into detail as to the legal landscapes in France and Germany and the impact of their different legal systems. He also reminded us that receivables are one thing in these legal systems but different asset types are another thing altogether. Closing with some excellent advice on recovery in the more distant eastern parts of Europe, an exercise that involves a lorry, a capacity to speedily empty warehouses and to quickly drive to the nearest friendly border. On this amusing but practical note he closed a first class presentation and his colleague Chris Harlowe then conducted the gathering through the changing insolvency landscape in Europe. Chris identified the changes introduced by the new EC Regulation on Insolvency Proceedings and developing trends in the practical application of the regulations. He then went through the recent court ruling that determined under the jurisdiction of which country an insolvency would be managed. It appears that the courts are applying some very practical decisions when identifying the principal place of business of a company. He highlighted an interesting ruling by the French court of appeal overruling a lower French court where the court of appeal stated that once main insolvency proceedings had been opened in one EU state they could not be commenced in another EU state. A first past the post principle applies and the country in which insolvency proceedings are first opened will be the prevailing jurisdiction. Keith Karako of Citigroup New York then took the stage and took us through an update on the US market and its implications for the UK. He reminded us that new products and structures developed in the US often find their way into the UK market whether in the capital markets or asset-based transactions. Cross-fertilisation of ideas and structures will improve both markets’ ability to bring innovative solutions to their clients. In America the smaller deals are generally held by one lender or done on a club basis with one or two other lenders. Larger deals – generally over $100m – are syndicated to more than three investors. In America from 1995 to 2002 there has been a compounded average growth rate of 18.9% in large-deal asset-based finance; the number of deals in recent years has been 80, 105 and 90 in 2001, 2002 and 2003 respectively. Average deal size was $235m, $226m and $311m respectively for those three years. Yields on these packages reflect market conditions and these were also examined and we then took a look at the industries utilising asset-based financing in America. Retail is a major beneficiary of this type of support and so one of the core themes of our conference was opened. Keith then pointed out that asset-based and high-yield notes compliment each other in bringing effective solutions to client financing needs. Of the 90 deals done in the USA in 2003, 72 of the borrowers had high-yield issues outstanding. A significant benefit of asset-based and high-yield debt finance to the customer is the imposition of minimal maintenance financial covenants, an especially attractive feature for all business but particularly cyclical ones. He also reported that junior lien tranches of debt started appearing five to six years ago. They started off as truly last-out money on the equity value remaining behind the first lien holder’s collateral but the junior lien tranch has now evolved to secure enterprise value loans behind an asset-based facility with a junior lien on collateral. This tranche has replaced the old over advance or stretch portion of asset-based deals. He returned to the covenant light theme telling us that this is a very effective selling tool against cashflow loans with traditional covenants and mentioned once again cyclical companies. Historic financial maintenance covenants are reduced to either a financial coverage ratio that is only measured when liquidity drops below a trigger level, or the sole financial maintenance covenant is a condition covering liquidity. He predicted that future asset- based lending trends would see more advances against non-traditional asset categories such as trade names, trade marks, patents, royalty strings or foreign assets. We also learned that hedge funds are becoming big investors in asset- based deals and that some are even structuring or agenting deals or renting an administrative agent once they have structured and syndicated the deal. He summarised saying that the US asset-based market continues to grow and evolve and that not only are these trends coming to the UK and selective European markets but that he knew of three American players who, finding the competition hot at home, were shortly to move to London. The coffee break came with much food for thought and following the interval Mark Roberts, managing director of WA Turner, a Kent-based traditional sausage and pie manufacturing company with substantial contracts with most of the major supermarkets took the stand. Mark had organised an MBO together with Lloyds TSB Commercial Finance and in an amusing and thought provoking delivery he took us through each stage. WA Turner Limited had been trading for 150 years but the parent company now wished to dispose of it and Mark Roberts put together his team to effect the buy-out. The time involved was prodigious, the support of a strong team essential and, as it turned out, so was the support and understanding of a good all-asset-based lender, in this case Lloyds TSB Commercial Finance. Having taken us through all of the preliminaries to the buy-out, Mark then discovered that being in charge of your own show brings problems. Firstly sales fell 22%, on the back of a fall away in promotional efforts in the retail outlets that use their product. The next challenge arose when suppliers, who had been happy to extend substantial credit whilst WA Turner Limited was part of a large group, took a distinctly more virginal view once it was flying free. Mark was fulsome in his praise for the understanding he received from Lloyds TSB Commercial Finance during this time and gradually sales reasserted themselves. He was keen to stress that whilst some suppliers had proved difficult, others had proved very loyal and supportive and we were left with a clear idea as to where he would be placing most of his future business. We could not get into the numbers here as they were shrouded in confidentiality but this was one that came from the heart and was very well received. The abiding message was the importance of communication with all suppliers but especially those supplying financial support. The debate is best reviewed in the summary. Lunch came and whilst the facilities at The Hatton had a hint of school dinners about them generally the feedback on the food and facilities was good although we noticed that those choosing the vegetarian option left most of it. The post-luncheon session is never one to be envied and now it was time to produce one of our stars. Dennis Turner, chief economist at HSBC, needs no introduction and in a riveting half-hour he paced the floor and gave us a punchy and focused analysis of the economy and the way ahead. His 30 minute stint passed all too quickly and Dennis was on his way and one of our heroes then mounted the stage. Our friends at Corven had been scheduled to conduct the session to tell us that more than finance was needed for successful turnaround and that a new strategy had also to be planted to give any prospect of success. Our own strategy was tested because, regrettably, Corven ran out of resources just before the conference and we are deeply indebted to our good friend Andrew Sheridan of Baker Tilly who found a “volunteer” in Karl Holmes who has recently joined them from Deloitte & Touche. Given the short notice Karl’s delivery was comprehensive and intensely detailed, much of the commentary, no doubt, arising from his extensive experience in turnaround situations. Karl was warmly applauded and Baker Tilly sincerely thanked for stepping into the breach. We then moved to another big hitting and international friend of Business Money in Kroll. At a meeting with them it had been agreed that the profile of the fraudster should be examined and Brian Stapleton, head of Kroll’s business intelligence and investigations practice since 1997 and ably assisted by Andrew Marshall, gave us the benefit of his experience. He took us through a number of well known fraudsters though he narrowed his grouping down to three and, borrowing from Shakespeare, he explained “some are born fraudsters, some become fraudsters and some have fraud thrust upon them”. He also took us through some fascinating statistics as to the categories of employee who conduct frauds – 56% of them are derived from management – and how the company discovered it. Up to 27% came from a tip off, 16% came from a management change, 32% were frighteningly thrown up by accident and other causes accounted for 25%. Robert Maxwell, Stephen Hinchcliffe and Nick Leeson were featured. Brian pointed out Maxwell had been caught before but was allowed to continue, Hinchcliffe bribed a banker and with Leeson, as indeed we in Business Money underlined at the time, Barings should have known it was just too good to be true. He closed by telling us that preventing fraud is good business practice with some fundamental rules – know your customers, know your business, know your employee. He reminded us that exposing fraud really matters. We should investigate, expose and go after the guilty. Above all do not be a soft target. We then closed with probably the most thought provoking session of the whole day. Paul McGowan, chief operating officer of Hilco UK, has gained extensive skills over the past 10 years in the European retail and fashion sector. He talked a lot of common sense about retail, pointed out how, seemingly, unhealthy positions can be turned into very healthy positions, substantially improving recovery prospects. He also reminded everyone present that retail markets are in fact a great deal more predictable than many of the others into which all-asset funders funnel money to support inventory. I could tell from the looks on the faces and the conversations I had with the leading lenders afterwards, that this message had struck home. Following the conference the response forms were unanimously strong in that we had achieved our aim in presenting a structured programme including a lively and positive debate on reservation of title – perceived to be the main impediment to the growth of all-asset finance in Britain and our friends left us deep in thought as to how they might expand their product range to embrace the areas to which Paul McGowan covered. I have missed out one session in the middle of the day. The 45 minute debate on reservation of title. I have left this to last because whilst it caused me a few anxious moments whilst it was warming up, we had with us some of the heaviest hitters in the land with a panel comprising Mike Woollard and Cathyrn Williams of Hammonds and David Breakell and Simon Boon of DLA offering legal opinions as we went along. To hear the leaders of our major all-asset finance houses discussing this issue in the way they did highlighted that reservation of title is an issue for some of them and could become more so if certain proposed legislative changes come in to force. That they must not do so is clearly very important. All were agreed that recovery from inventory was often disappointing on a collect-out though when the debate was undertaken they had not heard Paul McGowan’s session on how Hilco can actually substantially improve these yields, though Paul did mention that, in his professional lifetime, he had never had to pay back in full on a reservation of title condition. It was also felt that the credit insurers were becoming a great deal more difficult where reservation of title was concerned. There was a unanimous view that another Business Money conference 12 months hence is called for and it is incumbent on us to ensure that we can put together another progressive educational and stimulating programme next time. There was another message too. All-asset finance is here to stay in Britain. It is growing fast, it is becoming more competitive. Three more American banks will be over here to join in the party soon, J P Morgan and LaSalle are two of them and if our major banks do not wake up and start looking very closely at the situation then they may find some healthy competition right on the doorstep. Barclays I know is looking at an omnibus package and the recent recruitment of Jane McKenzie-Wynn, formerly of GMAC, may be an indication here. The Royal Bank Group is offering it but the loans are managed by the individual units responsible for the assets involved. HSBC is doing the same; the bank sent a representative to see what the conference had to offer. Significantly so too did Rothschilds which has just freed up £50m of capital following its retreat from its 200 year involvement with the gold markets and much of this will almost certainly be heading in the direction of the Five Arrows team which now of course has State Securities as part of its portfolio of offerings. The Bank of England sent two delegates too because there is a growing recognition in Threadneedle Street of the significance of all-asset finance. If you need more convincing just take a look at the article on Richard Pelly. This is one of GE’s heavy hitters, charming and personable though he is, his presence sends out a signal to every business lender in the land. Tunbridge Wells was just a blip along the learning curve and there is a recognition in GE that its European commercial lending operations have yet to be moulded into an entity with the presence and impetus worthy of the name. It will happen though as will the landing of several major American banks looking for some relief from the hot competition at home. Business Money will keep its friends appraised of developments through one channel, or another, but to those friends who missed the conference this year may I offer the comment of a leading lawyer. “The most high-calibre one day conference I have ever attended”. We would not presume to draw executives of this calibre away from their companies for more than a day and maybe that is why we were favoured with the presence of all of them bar the unavoidably absent Dennis Levine. The feedback forms and the comments I have heard afterwards suggest that those attending felt they had gained from the experience. We planned it as a total experience with a theme developing throughout the day so that those participating in all of the sessions would experience a holistic gain but it would not have worked without the wholehearted contribution of all present. We aimed for a participatory conference, We got one, and how. My heartfelt thanks to everyone who attended and who made it possible. Editor
Click for details of the 2005 Business Money All-Asset Finance Conference.
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